Worried about UK equities in the face of looming fiscal consolidation?
Don’t be, says Goldman Sachs — purveyors of sterling-slump strategies and sterling-strength research.
On the morning of Alistair Darling’s Budget report, in which the UK chancellor has the unenviable task of stimulating the economy while satisfying deficit-adverse bond markets, Goldman presents the following:
In this report we look first at companies with exposure to UK government spending – cuts in spending over the next few years look inevitable – and second we consider the broader implications of fiscal consolidation on the whole market. We do not see a fiscal adjustment as a hurdle to UK equity performance – quite the opposite as previous periods of fiscal adjustment across the OECD countries seem to have been associated with outperformance by the domestic market.
Amazingly, only 18 stocks have more than 15 per cent of their revenue tied to UK government spending, according to Goldman. Which means cutting the UK’s Budget deficit would be “marginally positive” for the British equity market in general. The positive effect would be higher were it not for the fact that most of the UK stock market is geared towards global (international) growth, Goldman says.
Anyway, Goldman’s done some number-crunching, examining that 35 years of budgetary data for 24 OECD economies. The idea is to find the effects of large budgetary adjustments on equities.
Here’s what they found:
And so, to Goldman’s conclusion:
It seems that, regardless of the method, as countries solve what is seen as a problem – too large a government deficit – they are rewarded with strong performing equities. No doubt this is helped by falling bond spreads and a more competitive currency. On balance a period of fiscal consolidation would not be damaging for the UK equity market in our view. Indeed we think it is likely to be positive at the margin as it will reduce the risk premium and reluctance of international investors to invest in the UK.
Hear that Alistair Darling? Not just happy bondholders, but happy equity markets too.
Sounds irresistible. Let’s wait and see.
The Budget is due out at 12:30 p.m. London time.
Related links:
UK Budget 2010 in-depth – FT
Reasons to be miserable, UK edition – FT Alphaville
Deficit reduction… details, details – Money Supply